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SFDR Level 2 Fuelled Article 9 Downgrades – Morningstar

A new report by Morningstar shows that Article 8 funds saw net inflows of over 25 billion (US$27.6 billion) in Q1 2023, double the inflows of the previous quarter, while Article 9 funds experienced their lowest inflows on record, totalling 4 billion. This was due to recent downgrades of over 300 products to Article 8 from Article 9 ahead of the implementation of the Sustainable Finance Disclosure Regulation (SFDR) Level 2’s regulatory technical standards in January. The combined assets in Article 8 and Article 9 funds increased by over 3% in the Q1 2023 to 4.9 trillion, representing a record 57% market share. Product development slowed down due to regulatory uncertainty and concerns about greenwashing accusations. Around 330 products changed their SFDR status in Q1 2023, with more than 260 funds upgrading to Article 8 from Article 6 and just a dozen downgrading to Article 8 from 9. The wave of Article 9 fund downgrades may be over and could be reverted, following clarifications from the European Commission that there won’t be minimum requirements for sustainable investments. Hortense Bioy, Global Director of Sustainability Research at Morningstar, advised investors to remain cautious and conduct proper due diligence, as SFDR is a disclosure regime, and Article 8 and Article 9 should not be used as labels. “Just over two years after SFDR came into force, the landscape of Article 8 and Article 9 funds continues to evolve amid persistent greenwashing concerns and regulatory uncertainty,” she said. “The recent clarifications from the European Commission on specific aspects of SFDR may result in further reclassifications. 

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